Citigroup boosting salaries to offset lower bonuses

Thursday

Jun 25, 2009 at 12:48 AM

By Martin Crutsinger and Stephen BernardAssociated Press

WASHINGTON | Citigroup Inc. is increasing the base salaries of many employees – reportedly by as much as 50 percent for some workers – as it restructures their compensation amid government restrictions on bonuses.The Obama administration reacted by pledging to aggressively implement a new law governing compensation at companies like Citigroup that have received billions of dollars in taxpayer-funded bailout support.Administration officials, however, refused to say whether Citigroup had informed the government in advance of its decision to restructure salary levels.The higher salaries at Citigroup are not the equivalent of annual raises because bonuses are being lowered, according to a person familiar with the matter who requested anonymity because the plans have not been made public.The person said the changes would not affect the amount of an employee’s compensation. By shifting the mix in compensation packages, the change could allow Citi to pay most employees as much as they received in 2008 while adhering to bonus caps. The person said the employees included traders, who tend to be compensated more heavily with bonuses, and middle- and lower-level managers whose compensation is more heavily weighted toward salaries.Not all employees will be affected equally by the change in compensation, according to the person. Only those who receive a base salary and bonus could see an adjustment. Even then, the adjustments will vary based on an employee’s position and current breakdown of pay between base salary and bonus.Before the financial crisis, top traders and investment bankers typically earned $125,000 to $250,000 in annual base salary and another $1 million to $5 million bonus, according to Alan Johnson, managing director of compensation consulting firm Johnson Associates.A New York Times report Wednesday said some employees’ salaries will rise as much as 50 percent because of the change in compensation structure.Employee compensation at financial companies, particularly in the form of bonuses, has brought criticism from members of Congress and the public after the government gave the banks hundreds of billions in bailout dollars. Citi and the other companies who still hold bailout funds face limits on bonuses as part of a new government compensation oversight plan.The administration said its point person on the issue, Kenneth Feinberg, had begun the process of reviewing compensation at the seven firms receiving the most assistance from the $700 billion bailout fund Congress passed in October.“Companies will need to convince Mr. Feinberg that they have struck the right balance to discourage excessive risk taking and reward performance for their top executives,” the statement said.Feinberg, a lawyer, was selected by the administration to be its “special master” to oversee compensation packages awarded to the seven companies, including Citigroup. He can reject pay plans he deems excessive and review compensation for the firms’ top 100 salaried employees.The 100 highest-paid employees at Citi will not be part of the bank’s revised compensation program because of the government’s additional review over that group’s pay.Sen. Christopher Dodd, D-Conn., a critic of financial firms’ compensation practices, said the salary decision showed Citi executives “just don’t get it” at a time when the country is mired in a deep recession with rising layoffs. He called Citi’s compensation changes “pay hikes.”Christopher Whalen, managing director of Institutional Risk Analytics, questioned whether Citi needs to pay as much to retain talented employees. He said with many large companies cutting salaries and commissions, and so few jobs available, people are more likely to stay put.“When the public owns a large stake in a bank, they have a right to have an opinion on this,” Whalen said. To make their own business decisions, banks must wean themselves off of government subsidies, he added.New York-based Citi said Wednesday that it’s examining “ways to ensure its employee compensation practices are competitive in this very challenging market environment.”“Any salary adjustments are not intended to increase total annual compensation, rather to adjust the balance between fixed and variable compensation,” the bank said in a statement.Other analysts weren’t troubled by Citi’s moves.“We should simply view this as a change in the composition of total compensation,” said Sung Won Sohn, an economics professor at California State University, Channel Islands.Citi and other banks likely are reconfiguring their compensation to avoid losing talented workers to competitors. Some of the banks that received government loans, including JPMorgan Chase & Co. and Goldman Sachs Group Inc., already have paid back their debt, and are no longer subject to compensation oversight. Those firms are able to offer lucrative deals to entice employees away from other banks.Citi has seen some defections from its ranks in recent months. The latest was the departure of Ajay Banga, CEO of its Asia Pacific division, who left to take a position at MasterCard Inc.Ravin Jesuthasan, global practice leader at the consultancy Towers Perrin, said in general, when a company increases its guaranteed base pay, it will keep some employees from leaving. But some high performers might see less incentive because the bonuses that have helped drive their performance are lowered.“It’s a bit of a balancing act,” Jesuthasan said.Citi has been among the hardest hit by the credit crisis and recession. It has reported six straight quarterly losses totaling nearly $30 billion. But it would have posted a profit in the first quarter had it not been for dividend payments on preferred stock. The bank has reduced staff and sold assets to streamline operations and return to profitability.Citigroup has received $45 billion from the government. A portion of those funds will soon be converted to common stock, giving the government a 34 percent stake in the bank.Earlier this year, American International Group Inc. was criticized for bonuses it paid to employees at one of its most troubled divisions. AIG was rescued from the brink of collapse by the government last fall. The Obama administration has blamed compensation plans for encouraging excessive risk-taking that pushed the financial services sector into chaos last year.Charlotte, N.C.-based Bank of America Corp., which received $45 billion in government support, is among those facing additional scrutiny about bonuses and executive compensation.“Bank of America looks forward to working cooperatively with Mr. Feinberg to ensure we comply with all applicable compensation regulation outlines by the Treasury,” said bank spokesman Scott Silvestri.To date, nearly 600 banks have received roughly $200 billion in bailout cash. Citigroup and Bank of America have received an additional $52.5 billion in government capital and guarantees.

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